Stock Analysis on Net
Stock Analysis on Net
Microsoft Excel LibreOffice Calc

Automatic Data Processing Inc. (NASDAQ:ADP)

Analysis of Goodwill and Intangible Assets

Advanced level


Accounting Policy on Goodwill and Intangible Assets

Goodwill

Goodwill represents the excess of purchase price over the value assigned to the net tangible and identifiable intangible assets of businesses acquired. Goodwill is tested annually for impairment or more frequently when an event or circumstance indicates that goodwill might be impaired.

ADP’s annual goodwill impairment assessment as of June 30, 2019 was performed for all reporting units using a quantitative approach by comparing the fair value of each reporting unit to its carrying value. ADP estimated the fair value of each reporting unit using, as appropriate, the income approach, which is derived using the present value of future cash flows discounted at a risk-adjusted weighted-average cost of capital, and the market approach, which is based upon using market multiples of companies in similar lines of business. Significant assumptions used in determining the fair value of ADP’s reporting units include projected revenue growth rates, profitability projections, working capital assumptions, the weighted average cost of capital, the determination of appropriate market comparison companies, and terminal growth rates. Several of these assumptions including projected revenue growth rates and profitability projections are dependent on ADP’s ability to upgrade, enhance, and expand the technology and services to meet client needs and preferences. As such, the determination of fair value requires management to make significant estimates and assumptions related to forecasts of future revenue and operating margins. Based upon the quantitative assessment, ADP has concluded that goodwill is not impaired.

Source: 10-K (filing date: 2019-08-09).


Goodwill and Intangible Asset Disclosure

Automatic Data Processing Inc., balance sheet: goodwill and intangible assets

US$ in thousands

Microsoft Excel LibreOffice Calc
Jun 30, 2019 Jun 30, 2018 Jun 30, 2017 Jun 30, 2016 Jun 30, 2015 Jun 30, 2014
Software and software licenses 2,519,300  2,292,900  1,975,200  1,811,600  1,648,700  1,626,900 
Customer contracts and lists 860,700  708,600  614,100  603,700  625,400  870,100 
Other intangibles 237,900  236,500  228,200  207,800  209,000  241,400 
Intangible assets, gross 3,617,900  3,238,000  2,817,500  2,623,100  2,483,100  2,738,400 
Accumulated amortization (2,546,400) (2,351,600) (2,197,300) (2,088,900) (1,979,900) (2,106,100)
Intangible assets, net 1,071,500  886,400  620,200  534,200  503,200  632,300 
Goodwill 2,323,000  2,243,500  1,741,000  1,682,000  1,793,500  3,113,800 
Goodwill and intangible assets, net 3,394,500  3,129,900  2,361,200  2,216,200  2,296,700  3,746,100 

Based on: 10-K (filing date: 2019-08-09), 10-K (filing date: 2018-08-03), 10-K (filing date: 2017-08-04), 10-K (filing date: 2016-08-05), 10-K (filing date: 2015-08-07), 10-K (filing date: 2014-08-08).

Item Description The company
Intangible assets, net Sum of the carrying amounts of all intangible assets, excluding goodwill, as of the balance sheet date, net of accumulated amortization and impairment charges. Automatic Data Processing Inc.’s intangible assets, net increased from 2017 to 2018 and from 2018 to 2019.
Goodwill Amount after accumulated impairment loss of an asset representing future economic benefits arising from other assets acquired in a business combination that are not individually identified and separately recognized. Automatic Data Processing Inc.’s goodwill increased from 2017 to 2018 and from 2018 to 2019.
Goodwill and intangible assets, net Sum of the carrying amounts of all intangible assets, including goodwill, as of the balance sheet date, net of accumulated amortization and impairment charges. Automatic Data Processing Inc.’s goodwill and intangible assets, net increased from 2017 to 2018 and from 2018 to 2019.

Adjustments to Financial Statements: Removal of Goodwill

Automatic Data Processing Inc., adjustments to financial statements

US$ in thousands

Microsoft Excel LibreOffice Calc
Jun 30, 2019 Jun 30, 2018 Jun 30, 2017 Jun 30, 2016 Jun 30, 2015 Jun 30, 2014
Adjustment to Total Assets
Total assets (as reported) 41,887,700  37,088,700  37,180,000  43,670,000  33,110,500  32,051,700 
Less: Goodwill 2,323,000  2,243,500  1,741,000  1,682,000  1,793,500  3,113,800 
Total assets (adjusted) 39,564,700  34,845,200  35,439,000  41,988,000  31,317,000  28,937,900 
Adjustment to Stockholders’ Equity
Stockholders’ equity (as reported) 5,399,900  3,459,600  3,977,000  4,481,600  4,808,500  6,670,200 
Less: Goodwill 2,323,000  2,243,500  1,741,000  1,682,000  1,793,500  3,113,800 
Stockholders’ equity (adjusted) 3,076,900  1,216,100  2,236,000  2,799,600  3,015,000  3,556,400 

Based on: 10-K (filing date: 2019-08-09), 10-K (filing date: 2018-08-03), 10-K (filing date: 2017-08-04), 10-K (filing date: 2016-08-05), 10-K (filing date: 2015-08-07), 10-K (filing date: 2014-08-08).


Automatic Data Processing Inc., Financial Data: Reported vs. Adjusted


Adjusted Financial Ratios: Removal of Goodwill (Summary)

Automatic Data Processing Inc., adjusted financial ratios

Microsoft Excel LibreOffice Calc
Jun 30, 2019 Jun 30, 2018 Jun 30, 2017 Jun 30, 2016 Jun 30, 2015 Jun 30, 2014
Total Asset Turnover
Reported total asset turnover 0.34 0.36 0.33 0.27 0.33 0.38
Adjusted total asset turnover 0.36 0.38 0.35 0.28 0.35 0.42
Financial Leverage
Reported financial leverage 7.76 10.72 9.35 9.74 6.89 4.81
Adjusted financial leverage 12.86 28.65 15.85 15.00 10.39 8.14
Return on Equity (ROE)
Reported ROE 42.46% 46.85% 43.59% 33.30% 30.21% 22.73%
Adjusted ROE 74.52% 133.28% 77.52% 53.31% 48.18% 42.62%
Return on Assets (ROA)
Reported ROA 5.47% 4.37% 4.66% 3.42% 4.39% 4.73%
Adjusted ROA 5.80% 4.65% 4.89% 3.55% 4.64% 5.24%

Based on: 10-K (filing date: 2019-08-09), 10-K (filing date: 2018-08-03), 10-K (filing date: 2017-08-04), 10-K (filing date: 2016-08-05), 10-K (filing date: 2015-08-07), 10-K (filing date: 2014-08-08).

Financial ratio Description The company
Adjusted total asset turnover An activity ratio calculated as total revenue divided by adjusted total assets. Automatic Data Processing Inc.’s adjusted total asset turnover ratio improved from 2017 to 2018 but then slightly deteriorated from 2018 to 2019 not reaching 2017 level.
Adjusted financial leverage A measure of financial leverage calculated as adjusted total assets divided by adjusted total equity.
Financial leverage is the extent to which a company can effect, through the use of debt, a proportional change in the return on common equity that is greater than a given proportional change in operating income.
Automatic Data Processing Inc.’s adjusted financial leverage ratio increased from 2017 to 2018 but then decreased significantly from 2018 to 2019.
Adjusted ROE A profitability ratio calculated as net income divided by adjusted shareholders’ equity. Automatic Data Processing Inc.’s adjusted ROE improved from 2017 to 2018 but then deteriorated significantly from 2018 to 2019.
Adjusted ROA A profitability ratio calculated as net income divided by adjusted total assets. Automatic Data Processing Inc.’s adjusted ROA deteriorated from 2017 to 2018 but then improved from 2018 to 2019 exceeding 2017 level.

Automatic Data Processing Inc., Financial Ratios: Reported vs. Adjusted


Adjusted Total Asset Turnover

Microsoft Excel LibreOffice Calc
Jun 30, 2019 Jun 30, 2018 Jun 30, 2017 Jun 30, 2016 Jun 30, 2015 Jun 30, 2014
As Reported
Selected Financial Data (US$ in thousands)
Revenues 14,175,200  13,325,800  12,379,800  11,667,800  10,938,500  12,206,500 
Total assets 41,887,700  37,088,700  37,180,000  43,670,000  33,110,500  32,051,700 
Activity Ratio
Total asset turnover1 0.34 0.36 0.33 0.27 0.33 0.38
Adjusted for Goodwill
Selected Financial Data (US$ in thousands)
Revenues 14,175,200  13,325,800  12,379,800  11,667,800  10,938,500  12,206,500 
Adjusted total assets 39,564,700  34,845,200  35,439,000  41,988,000  31,317,000  28,937,900 
Activity Ratio
Adjusted total asset turnover2 0.36 0.38 0.35 0.28 0.35 0.42

Based on: 10-K (filing date: 2019-08-09), 10-K (filing date: 2018-08-03), 10-K (filing date: 2017-08-04), 10-K (filing date: 2016-08-05), 10-K (filing date: 2015-08-07), 10-K (filing date: 2014-08-08).

2019 Calculations

1 Total asset turnover = Revenues ÷ Total assets
= 14,175,200 ÷ 41,887,700 = 0.34

2 Adjusted total asset turnover = Revenues ÷ Adjusted total assets
= 14,175,200 ÷ 39,564,700 = 0.36

Activity ratio Description The company
Adjusted total asset turnover An activity ratio calculated as total revenue divided by adjusted total assets. Automatic Data Processing Inc.’s adjusted total asset turnover ratio improved from 2017 to 2018 but then slightly deteriorated from 2018 to 2019 not reaching 2017 level.

Adjusted Financial Leverage

Microsoft Excel LibreOffice Calc
Jun 30, 2019 Jun 30, 2018 Jun 30, 2017 Jun 30, 2016 Jun 30, 2015 Jun 30, 2014
As Reported
Selected Financial Data (US$ in thousands)
Total assets 41,887,700  37,088,700  37,180,000  43,670,000  33,110,500  32,051,700 
Stockholders’ equity 5,399,900  3,459,600  3,977,000  4,481,600  4,808,500  6,670,200 
Solvency Ratio
Financial leverage1 7.76 10.72 9.35 9.74 6.89 4.81
Adjusted for Goodwill
Selected Financial Data (US$ in thousands)
Adjusted total assets 39,564,700  34,845,200  35,439,000  41,988,000  31,317,000  28,937,900 
Adjusted stockholders’ equity 3,076,900  1,216,100  2,236,000  2,799,600  3,015,000  3,556,400 
Solvency Ratio
Adjusted financial leverage2 12.86 28.65 15.85 15.00 10.39 8.14

Based on: 10-K (filing date: 2019-08-09), 10-K (filing date: 2018-08-03), 10-K (filing date: 2017-08-04), 10-K (filing date: 2016-08-05), 10-K (filing date: 2015-08-07), 10-K (filing date: 2014-08-08).

2019 Calculations

1 Financial leverage = Total assets ÷ Stockholders’ equity
= 41,887,700 ÷ 5,399,900 = 7.76

2 Adjusted financial leverage = Adjusted total assets ÷ Adjusted stockholders’ equity
= 39,564,700 ÷ 3,076,900 = 12.86

Solvency ratio Description The company
Adjusted financial leverage A measure of financial leverage calculated as adjusted total assets divided by adjusted total equity.
Financial leverage is the extent to which a company can effect, through the use of debt, a proportional change in the return on common equity that is greater than a given proportional change in operating income.
Automatic Data Processing Inc.’s adjusted financial leverage ratio increased from 2017 to 2018 but then decreased significantly from 2018 to 2019.

Adjusted Return on Equity (ROE)

Microsoft Excel LibreOffice Calc
Jun 30, 2019 Jun 30, 2018 Jun 30, 2017 Jun 30, 2016 Jun 30, 2015 Jun 30, 2014
As Reported
Selected Financial Data (US$ in thousands)
Net earnings 2,292,800  1,620,800  1,733,400  1,492,500  1,452,500  1,515,900 
Stockholders’ equity 5,399,900  3,459,600  3,977,000  4,481,600  4,808,500  6,670,200 
Profitability Ratio
ROE1 42.46% 46.85% 43.59% 33.30% 30.21% 22.73%
Adjusted for Goodwill
Selected Financial Data (US$ in thousands)
Net earnings 2,292,800  1,620,800  1,733,400  1,492,500  1,452,500  1,515,900 
Adjusted stockholders’ equity 3,076,900  1,216,100  2,236,000  2,799,600  3,015,000  3,556,400 
Profitability Ratio
Adjusted ROE2 74.52% 133.28% 77.52% 53.31% 48.18% 42.62%

Based on: 10-K (filing date: 2019-08-09), 10-K (filing date: 2018-08-03), 10-K (filing date: 2017-08-04), 10-K (filing date: 2016-08-05), 10-K (filing date: 2015-08-07), 10-K (filing date: 2014-08-08).

2019 Calculations

1 ROE = 100 × Net earnings ÷ Stockholders’ equity
= 100 × 2,292,800 ÷ 5,399,900 = 42.46%

2 Adjusted ROE = 100 × Net earnings ÷ Adjusted stockholders’ equity
= 100 × 2,292,800 ÷ 3,076,900 = 74.52%

Profitability ratio Description The company
Adjusted ROE A profitability ratio calculated as net income divided by adjusted shareholders’ equity. Automatic Data Processing Inc.’s adjusted ROE improved from 2017 to 2018 but then deteriorated significantly from 2018 to 2019.

Adjusted Return on Assets (ROA)

Microsoft Excel LibreOffice Calc
Jun 30, 2019 Jun 30, 2018 Jun 30, 2017 Jun 30, 2016 Jun 30, 2015 Jun 30, 2014
As Reported
Selected Financial Data (US$ in thousands)
Net earnings 2,292,800  1,620,800  1,733,400  1,492,500  1,452,500  1,515,900 
Total assets 41,887,700  37,088,700  37,180,000  43,670,000  33,110,500  32,051,700 
Profitability Ratio
ROA1 5.47% 4.37% 4.66% 3.42% 4.39% 4.73%
Adjusted for Goodwill
Selected Financial Data (US$ in thousands)
Net earnings 2,292,800  1,620,800  1,733,400  1,492,500  1,452,500  1,515,900 
Adjusted total assets 39,564,700  34,845,200  35,439,000  41,988,000  31,317,000  28,937,900 
Profitability Ratio
Adjusted ROA2 5.80% 4.65% 4.89% 3.55% 4.64% 5.24%

Based on: 10-K (filing date: 2019-08-09), 10-K (filing date: 2018-08-03), 10-K (filing date: 2017-08-04), 10-K (filing date: 2016-08-05), 10-K (filing date: 2015-08-07), 10-K (filing date: 2014-08-08).

2019 Calculations

1 ROA = 100 × Net earnings ÷ Total assets
= 100 × 2,292,800 ÷ 41,887,700 = 5.47%

2 Adjusted ROA = 100 × Net earnings ÷ Adjusted total assets
= 100 × 2,292,800 ÷ 39,564,700 = 5.80%

Profitability ratio Description The company
Adjusted ROA A profitability ratio calculated as net income divided by adjusted total assets. Automatic Data Processing Inc.’s adjusted ROA deteriorated from 2017 to 2018 but then improved from 2018 to 2019 exceeding 2017 level.